The end of this tax year is imminent, so now is the time to act to ensure you’ve made the most from your available tax saving opportunities in this tax year. In this blog we reveal the top nine things to consider before 5 April, to make sure that your money is working as hard as possible for you and your small business.
- Ensure you’ve made the most from your £20,000 ISA allowance
- If you have a spouse or civil partner, ensure they’ve also used their ISA allowance, thus ultilising your combined £40,000 allowance
- If you have children, ensure you’ve made the full £9,000 contributions per child into their Junior ISA
- If you’re planning on maximising your pension savings, consider utilising your annual allowance. If you have any unused allowance you’re able to carry it forward for the previous three years, so if you’ve already used up all of your 2021/22 tax year allowance it’s worth checking the past three years
- If you’re a high income earner there are a few steps you can take to reduce your taxable income in the form of making pension contributions or charitable donations. By doing so you’re able to:
- Bring your income to below the additional rate tax band, which starts at £150,000
- Regain your Personal Allowance, which begins to be withdrawn once your income exceeds £100,000
- Avoid losing out on Child Benefit monthly payments, which begins to reduce once you or your partner earns above £50,000 pa, and stops completely once you earn £60,000 pa
- Take advantage of your Capital Gains Tax (CGT) by releasing £12,300 in gains this tax year. There’s a chance the government might increase CGT rates soon, so ensure you make the most of the current rate whilst you still can
- Use your £3,000 IHT gifting exception for the current tax year
- Minimise your Income Tax Liability by spreading any large pension withdrawls over two or more years
- Reduce your company’s liability to Corporation Tax, Income Tax (including on dividends), and NICs by diverting your company’s pre-tax profits into a personal pension. For your company to qualify for the deduction in the accounting period you’ll need to make any contributions before your company’s financial year-end
Before taking action on any of the above points, always be sure to run your plans past your Vantage Accountant, who will be able to advise further.
Tax planning doesn’t end there
The previous ten points are the most important ones we suggest actioning prior to 6 April 2022, but there are some other things you can be doing to ensure you’re not losing out. The following points tend to have the greatest impact if started before the start of the new tax year, so now is the perfect time to have a think about what you can be doing.
Please note that this list isn’t exclusive, and covers the tax opportunities that are only available to those who reside within the UK for the 2021/22, and 2022/23 tax years.
Tax planning is an important part of running your small business’ Limited Company, but remember that it doesn’t form the whole picture. Your specialist Vantage Accountant will be able to advise you professionally on all aspects of running your company.
- Avoid falling into the 45% tax band by reducing your income below the £150,000 threshold. You can reduce your taxable income by making pension contributions, or by making charitable donations
- If you’re married/in a civil partnership ensure you both have sufficient income to use your personal allowance, which is £12,570 for 2021/22
- Personal allowance will be gradually withdrawn if your adjusted net income exceeds £100,000. Pension contributions prior to 6 April 2022 could reduce your taxable income to below £100,000 to restore some / all of the 2021/22 personal allowance which would otherwise be lost
- Invest in tax-free investments, such as ISAs. Tax free income and gains will then replace taxable income and gains, or investment bonds which can provide valuable tax deferment
- Consider distributing your investment capital between spouses / civil partners. If you’re living with them, or where the asset that’s to be transferred is an investment bond, then no capital gains tax or income liability will arise on transfers between one and another
Pensions – planning opportunities
- The carry forward rule means you’re able to use any unused annual allowance for a maximum of the past three years. 5 April 2022 will be your last chance to make the most of any leftover allowance up to the value of £40,000 from the 2018/19 tax year
- The threshold income level and the adjusted income level for the tapered annual allowance for 2021/22 tax year are £200,000 and £240,000. This in theory should mean that less pension members will be affected by the tapered annual allowance from 2021/22, than in the previous years. This will ultimately mean greater pension savings along with the possibility of avoiding a tax charge
- Should your adjusted net income exceed £100,000 then the personal allowance reduces by £1 for every £2 earnt. So for the tax year 2021/22 there will be no personal allowance available once your adjusted net income exceeds £125,140. Making pension contributions you’ll be increasing your overall pension provisions, but if you’re also subject to reduced personal allowance, then a personal pension contribution could claw back some of this allowance giving an effective tax saving of around 60%, and possibly more with salary sacrifice
- By making pension contributions you’re also able to help your family reclaim your Child Benefit. As soon as a single member of your household earns £50,000 pa your Child Benefits are reduced, and should a member earn £60,000 pa or more the benefit is stopped completely
- The death benefit rules on pensions from 6 April 2015 should have instigated a review of the pension scheme and /or the expressions of wish regarding the recipients of pension death benefits. If this has not yet been done, then now is the time to do so. So in theory, a person’s pension plan could provide an income for the people they leave behind, as beneficiaries will be able to pass the money to their children and so on and so forth
- Individuals should consider making personal net pension contributions of up to £2,880 (£3,600 gross) per year for members of their family, including any children and grandchildren, who do not yet have relevant UK earnings. The basic rate tax relief of £720 added by the government each year is a significant benefit and the sooner that pension contributions are made the greater they’ll benefit from compounded tax-free returns
ISAs and JISAs
- Any unused subscription amount cannot be carried over into the new tax year, so any annual subscriptions (£20,000 and £9,000 respectively) should be maximised before 6 April 2022
EISs / VCTs
- EIS – You’re able to invest up to £1 million, or £2 million where any amount above £1 million is invested in knowledge-intensive companies. The maximum income tax relief is 30%. Unlimited capital gains tax deferral relied – so long as some of the EIS investment could potentially qualify for income tax relief. It must be paid by 6 April 2022 in order to be able to carry back an EIS subscription for tax relief in 2020/21
- VCTs – you’re able to invest up to £200,000 and the maximum income tax relief is 30%. You’re not able to defer capital gains tax, but any dividends and capital gains generated on amounts invested within the annual subscription limit are tax free
Be aware! Of the likely greater investment risk and lower liquidity that will need to be accepted in return for the enticing tax reliefs offered by EISs and VCTs.
Capital Gains Tax
Capital gains tax planning is based around the action either ahead of, or at the time of the disposal of an asset to reduce or eradicate a current or future liability to capital gains tax. This process may involve one of the following:
- The timing of the transaction ie – either bringing it forward or delaying it
- Ensuring that all of the available exemptions and reliefs have been taken full advantage of
- Depending on what your own personal objectives are, prior transactions such as transfers to a spouse/civil partner, or the use of a trust
- Making full use of the annual exempt amount
- Also making use of any available losses
Capital gains tax planning
- Make the most of this year’s annual exemption (which is currently £12,300). Remember that any amount which isn’t used cannot be carried forward
- If you wish to defer the tax payment for a year, make a disposal after 5 April 2022
- If you want to use two annual exemptions close to one another, make one before 6 April, and the other afterwards
Ensure that each spouse/civil partner uses their annual exemption. Assets can be transferred between partners to facilitate this.
- Each person has an annual exemption of £3,000 per tax year. If you have any unused exemption you’re able to carry it over for one year, so check to see if you have any outstanding, and be sure to use it before 6 April 2022.
- The annual £250 exemption can’t be carried over into the next year. You’re able to make as many gifts of up to £250 as you wish that’s free of inheritance tax, so long as the recipient doesn’t receive any part of the giver’s £3,000 annual exemption.
- If you have income that’s surplus to your requirements, it might be a good idea to establish a plan whereby regular gifts are made from your income in order to make use of the normal expenditure out of income exemption. A good way to do this is to pay premiums into a whole life policy in trust to provide for any inheritance tax liability.
How can Vantage help?
Ensuring you’re making the most of your money before the new tax year can be daunting, especially if you’re unsure which options are available to you and how much of each exemption is left for you to use.
The expert director-level accountants here at Vantage deal with small business owners and their specific individual needs, both on a personal and professional level every day, ensuring that they’re making the most from their take home pay. If this sounds like the level of support and guidance you need in order to be making the most from your income, get in touch today.